Insight

EU VAT Action Plan - solutions for micro-businesses and SMEs?

September 2016

In addition to addressing the problems arising from cross-border sales of "digital services", however, the proposed VAT Action Plan appears to go somewhat further in promising a package of reforms to deliver a simpler VAT regime for SMEs selling digital and tangible goods into the EU.

But, post-Brexit, are UK businesses likely to benefit? It would appear so. One of the European Commission's objectives in simplifying the current cross-border VAT regime appears to be to "improve collaboration between EU and non-EU jurisdictions". Since the proposed reforms are intended to address the problems of both EU and non-EU businesses selling into the EU, even outside it the UK's small businesses - together with other EU and non-EU exporters - could have much to gain.

The EU VAT Plan appears to be driven by two imperatives: to establish a single and uniform VAT system across all Member States, based on taxation at the point of delivery or supply; and to reduce complexity while making the current system less susceptible to VAT fraud - something the EC estimates to be costing EUR50 billion per year.

The EC's proposals focus on four key initiatives:

the introduction of key principles to support a single and uniform European VAT system;

short-term measures to tackle VAT fraud;

options to modernise the EU framework for Member States in setting VAT rates; and

plans to simplify VAT rules for e-commerce as part of the EC's Digital Single Market (DSM) Strategy, as well as delivering a package of VAT reforms to make compliance easier for start-ups and SMEs.

The EU VAT Action Plan - what does it mean for SMEs?

Removing obstacles to e-commerce

The introduction of new "place of supply" rules in 2015 caused havoc for many micro-businesses selling electronic and digital goods (including e-books, telecoms and e-commerce services, etc.) cross-border. Intended to establish the principle of these being taxed at the point of supply (as opposed to their place of production, as had previously been the case), many micro-businesses that had been selling cross-border for years now found themselves subject to an onerous compliance burden in managing new VAT obligations in all of the EU countries they sold into. The establishment of a "one-stop shop", known as "VATMOSS" - enabling a seller to declare and pay all VAT due in respect of both domestic and EU sales in its own jurisdiction, with that tax authority then transferring VAT revenues to those other Member States in which VAT is due - while intended to minimise impacts for micro-businesses, failed to address a number of issues - not least the problems of customers paying for goods via PayPal and other portals. More immediately, many UK micro-businesses operating below the UK VAT threshold of £82,000 found themselves obliged to register for the first time in order to meet their VAT obligations abroad.

As part of its "Digital Market Strategy", the EC is due to present proposals to address several of these problems at the end of 2016. Plans announced so far include a number of initiatives likely to be of immediate benefit to SMEs, including:

extending the one-stop shop to both EU and non-EU countries selling "tangible goods" as well as digital services to end-users online;

introducing a common EU-wide VAT threshold (with exemptions for micro-businesses and SMEs);

allowing "home country" checks (meaning producers are only subjected to a single VAT audit, in their home country); and

removing current VAT exemptions on imports of small consignments from non-EU suppliers: a loophole that effectively allows non-EU suppliers to supply goods of up to €10 (€22 in some Member States) VAT-free - clearly putting the EU's SME exporters at a major competitive disadvantage, as well as resulting in an estimated €355 million in lost tax revenues every year.

Extending of the one-stop-shop for tangible goods

While SMEs are able to use VATMOSS for electronic services, the system is not yet available for sales of "tangible" goods sold over the Internet, and sellers of these goods still have to register for VAT in each Member State into which they sell. It is the EC's intention to make VATMOSS available to businesses selling tangible goods, under which sellers will be able to declare and pay all VAT on both domestic and EU sales within their home jurisdictions, with their domestic tax authority then transferring VAT revenues to other Member States where these are due.

A VAT-free threshold for start-ups and SMEs

The EC also plans to establish a universal VAT threshold below which start-ups and micro-businesses will be exempt, and will not be required to register under the VATMOSS system. The EU VAT Action Plan gives very little detail here, however, and no indication of the level at which such threshold is likely to be set. The Confédération Fiscale Européenne (CFE, the association of European tax advisors), has called for a VATMOSS registration threshold of €125,000 per annum; commentators protesting the introduction of VATMOSS last year had called for a minimum threshold of €100,000. Any confirmation is likely to be one of the most keenly awaited aspects of EC SME reform plans to be announced at the end of this year.

2017 SME VAT simplification package proposed

Again, while short on detail, the EU VAT Action Plan does at least offer some comfort for SMEs in promising a "comprehensive simplification package for SMEs." With no legislative proposals anticipated until 2017, however, it is not yet clear what this is likely to include, beyond a clear intention to reduce the current compliance burden on micro-businesses.

Nonetheless, in addressing many of the issues raised so frequently (and vocally) following the place of supply reforms last year, SMEs and start-ups have reason to look forward to a substantial reduction in their compliance obligations, going forward.